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The 2013 вЂњtaper tantrum,вЂќ which occurred after the Fed merely suggested that it would rein in QE, would pale in comparison.Д¬entral banks are terrified of this scenario because it would render both their levers useless.

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But if they follow their instincts and shift their two levers, tapering QE and modestly raising interest rates, they run the risk of triggering two crises at once: A jobs bonfire, as increasing interest rates reduce aggregate demand and dampen investment, and a financial crash, as markets and corporations, addicted to free QE money and over-extended, panic at the prospect of withdrawal. If they donвЂ™t, they can expect the ignominy suffered by their 1970s predecessors, who allowed inflation to become embedded in the price-wage dynamic. Now that inflation is in the air, central banks are nervous. If inflation appeared, all they need do was push down on the lever and taper the asset purchases. Pushing it up created money to purchase paper assets from commercial banks in the hope that the banks would inject the new money directly into the real economy.

Taking a page from the Bank of Japan, major central banks (led by the US Federal Reserve and the Bank of England) created a second lever, known as quantitative easing (QE). Today, central bankersвЂ™ work is twice as complicated, because, since 2009, they have had two levers to manipulate.ДЇollowing the 2008 global financial crisis, a second lever became necessary, because the original one got jammed: Even though it had been pushed down as far as possible, driving interest rates to zero and often forcing them into negative territory, the economy continued to stagnate. Timing these moves, and deciding by how much to move the lever, was never easy, but at least there was only one move to make: push the lever up or down. Push down to revitalize a flagging economy push up to rein in inflation (often at the expense of triggering a recession).

Central bankers once had a single policy lever: interest rates.